Hyperinflation and Labor Shortage in Construction?

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The construction industry has been experiencing an unprecedented mix of steeply rising material prices, supply chain issues and labor shortages. Over the last year input costs, which is the price of all materials and services, has increased 26.3%. Meanwhile, bid prices, what contractors say they would charge to erect nonresidential buildings, has gone up just 3.4%.
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0:00 Introduction
1:49 Reasons for inflation
2:17 Demand Supply
2:52 Labor shortage
5:45 Texas freeze
6:45 International shutdowns
7:16 Tariff & quotas
8:05 Eviction moratorium
8:43 Hyperinflation

The Associated General Contractors of America or AGC has issued a Construction Inflation Alert to help people better understand the current situation. I recently spoke to Ken Simonson, author of the report and chief economist of the AGC since 2001. He synthesizes data and feedback from general contractors in his weekly newsletter Data DIGest.

At the start of the lockdown, many factories, mills and fabrication facilities were shut down because they weren’t “essential”. This led to a negative supply shock. At the same time, we experienced a positive demand shock from people stuck at home taking on DIY projects and renovations. Restaurants also added decks and railings for outdoor dinings and acrylic barriers between tables. Low interest rates have also led to a surge in new home construction.

Once production facilities were allowed to open, many had trouble getting to full capacity because they simply cannot find workers. Unemployment benefits, rent relief, child tax credit or handouts are contributing factors but there are other reasons too. Another reason is the availability of remote, flexible, work-from-home jobs that are more enticing than outdoor manual labor. Construction jobs typically require you to be on site 5 or 6 days a week at set times.

The freeze in Texas earlier this year led to widespread power failures and the paralysis of the US petrochemical industry that normally operates around the clock. These are the building blocks for a wide wide range of construction products including PVC pipes, plumbing fittings, vinyl siding, vapor barriers, binders, glue for plywood and OSB and adhesives for drywall.

The production and shipping shutdowns in China and Europe are also contributing factors. Production has since increased but we are now dealing with clogged ports, and a lack of shipping containers, ships, and trucks. Ports are backed up forcing ships to wait offshore for days before unloading which has slowed down the delivery of materials by months in some cases.

In 2017, the US imposed new 20% tariffs on Canadian softwood lumber imports, which could have contributed to the increasing lumber prices. While the tariffs were cut to 9% in December 2020 there are talks of increasing the tariffs back to 18%. Just as prices of raw materials have started to level off, we’re now dealing with increased diesel fuel prices that are affecting transportation costs. Any savings are now being eaten up by fuel surcharges.

The eviction moratorium was established in March 2020 to help struggling tenants avoid eviction but it is set to expire soon. While it is easy to paint landlords as rich money grabbers, 77% of rental units are actually owned by Mom and Pop operations that cannot afford to let people live rent free in their homes. The extended eviction moratorium deadlines have cut supply of housing and led to bottled up inflation.

In his quarterly report, Ken presented some advice to help the construction industry during these hard times. He advocates for price-adjustments clauses to protect both parties from price swings. He believes that government officials need to remove or lessen any unnecessary hurdles to the importation, domestic production, transport, and delivery of products. Federal trade officials must end tariffs and quotas that are adding to price increases and supply shortage. He calls for cooperation and communication between owners and contractors to reduce damage.
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#hyperinflation #construction #michaelburry #warrenbuffett #inflation #lumber

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